World Bank Sounds Alarm Over Massive Debt in Emerging Markets

The World Bank has sent a stark warning over a crisis that has been brewing for quite some time, but has failed to attract much attention on the part of traders and investors. The crisis in question is that of the debt accumulated by emerging market countries. According to a World Bank report published on Thursday, developing countries have amassed a staggering debt of $55 trillion, as of the end of 2018. The debt-to-GDP ratio, an important barometer of economic stability, stands at 168 percent for emerging market countries, an increase of some 54% since 2010. The report notes that the current debt wave in emerging markets “could follow the historical pattern and culminate in financial crises in these economies”.

A high debt ratio is not a new phenomenon for developing countries, and the World Bank and International Monetary Fund have been sounding the alarm over this for years. What is new (and ominous) is the current low-interest rate environment in global markets. This has enabled these nations to take advantage of easy credit, bringing with it the dangers of misuse and corruption. The era of low rates will have to end sometime, and that would mean an unsustainable debt for many of these countries.

With 75 percent of emerging market countries contending with budget deficits, a spike in interest rates or a global shock could spark a massive financial crisis. David Malpass, the head of the World Bank, has warned that “the size, speed and breadth of the latest debt wave should concern us all. Clearly, it’s time for course corrections.”

This warning should serve as a red flag for investors and traders who are looking to sink funds into emerging markets. True, the gains can be spectacular, but as the World Bank has warned, there are clear and present dangers as well.